Mortgage points, or discount points, are used to prepay a portion of the interest on your mortgage. Your lender will present these points to you as a way to lower your interest rate.
Buying these points sounds like a great way to save money, but is it really?
Should you buy discount points or put more money towards your down payment when buying a home in Texas?
Paying upfront to lock in a lower interest rate may sound like a good idea, but there are several reasons you may want to avoid mortgage points when taking out a home loan.
How Discount Points Work
When you apply for a home loan, expect your lender to offer you discount points.
These points will be presented on the Loan Estimate and Closing Disclosure documents. Your lender will offer you 1-3 discount points which can be purchased for a one-time fee.
Many buyers get talked into purchasing mortgage points because they believe it will save them money on interest.
How much do mortgage points actually save?
One point is equal to 1% of your home’s value. Depending on your lender, purchasing this point will lower your interest rate by one-eighth to one-quarter of a percent.
Mortgage points are often presented to buyers as a smart way to save money.
Of course, there’s always a catch.
When you purchase these mortgage points, you’re simply prepaying interest on your home. You’re not paying down the principal.
This means you could lose money if you sell your home before you reach the break-even point.
Should You Buy Mortgage Points? Calculate Your Break-Even Point First
To calculate your break-even point, simply divide the cost of the discount point by the amount you’d save on interest each month by purchasing the points.
The number you get will be the number of months it will take for your investment to pay off.
Many homeowners never reach the break-even point because they sell, pay off, or refinance their homes.
Why risk losing money on mortgage points when you could put that money towards the down payment?
If your interest rate is too high, you may need to lower your budget.
Adjustable-Rate Mortgage Points
Mortgage points on ARM loans are even riskier because your lender has the ability to snatch your discount when the fixed-rate period ends.
Many buyers end up losing the money they spent purchasing the points when their lender decides to end their discount.
Be smart and don’t let lenders talk you into something that’s not in your best interest.
Avoid buying points, especially on ARM loans, and put that money towards your down payment instead.
Mortgage Points and Taxes
If you turn down mortgage points, your lender may urge you to buy them for the tax deduction.
In order for mortgage points to be tax-deductible, your home loan has to meet a long list of qualifications determined by the IRS.
Even if your points are tax-deductible, you still won’t recoup your money unless you surpass your break-even point.
When you’re shopping for your Houston home, it’s best to avoid mortgage points and put that money to better use.
